What is Real Estate Private Equity?
Private equity real estate, also known as REPE, is comprised of privately raised, pooled funds being used for the acquisition, financing, development, and ownership of one or more real estate properties. REPE is a type of alternative investment class outside of the traditional, SEC-regulated investment arenas, such as REITs and the stock market.
Return perspective is another crucial method of assessing real estate opportunities:
Fixed income real estate is the direction investors go when they want predictability. These properties facilitate property assets without the worry of performance volatility as values move up and down. A selection of private equity real estate funds offers project financing by adhering to themes such as senior/ mezzanine debt or preferred equity. These models generally establish:
-A maturity date
-A set interest (or coupon) is paid on a predictable schedule.
Core Real Estate embraces the highest quality real estate (commonly called Class A properties) because they focus on long-term tenants like CVS or Publix. Moreover, the debt involved is only a maximum of 40% of the total investment. Returns are steady between 7 and 10% on a reliable pre-arranged schedule. It’s an option for investors who want protection in recessions preferably, similar to bonds.
Core Plus Real Estate is a category that’s distinctly more aggressive than “Core” above, but still with substantial tenants in good (but not iconic) locations. In addition, the debt percentage stretches to around 60%, thus uplifting expected regular returns to low double digits, capping at 13% annually.
Value-Add Real Estate almost explains itself. The latter appeals to passive investors who follow a competent general partner buying low occupancy commercial real estate (semi-distressed), then stabilizing and repositioning it for a medium-term turnaround. The process often calls for substantial refurbishment and perhaps numerous renovation sub-projects. The attraction rests in annual returns of around fifteen percent once back on an even keel, with significant capital gains down the line on the possible resale of the asset. Debt levels on value add can go as high as 80%.
Opportunistic Real Estate represents another class of alternative investments in multifamily real estate. There's an abundance of high expectations for outperforming returns (well above 20% IRR, after all, is said and done) under the right general partners. Construction debt funding with refinancing rounds, and an initial lease-up period, alongside out-of-the-box thinking to reposition, are typical of this option. One must expect a lengthy new construction or challenging renovation in the mix. All said-substantial capital gains on the sale of new multifamily construction figure heavily into opportunistic real estate.
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